Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2019. The supplied request metadata identifies “2018 Q3,” but the filing itself is the fiscal 2020 third-quarter report, filed February 10, 2020.
Business context and reporting period
Mesa develops and sells quality-control products and services for regulatory-driven niche markets. Reportable segments were Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, Cold Chain Monitoring, and Cold Chain Packaging. The company completed its largest acquisition, Gyros Protein Technologies Holding AB (GPT), on October 31, 2019, adding the Biopharmaceutical Development segment. GPT results were consolidated from November 1, 2019.
Mesa also completed the acquisition of IBP Medical GmbH in April 2019 and completed the exit of its Cold Chain Packaging business during the quarter. The packaging segment is not treated as a discontinued operation.
Key financial metrics
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Revenue | $31.655 million | $26.682 million | $83.479 million | $76.689 million |
| Gross profit | $14.677 million | $15.634 million | $46.292 million | $45.302 million |
| Gross margin | 46% | 59% | 55% | 59% |
| Operating income (loss) | $(3.381) million | $1.320 million | $6.595 million | $7.222 million |
| Net income (loss) | $(4.630) million | $0.858 million | $3.029 million | $6.082 million |
| Diluted EPS | $(1.06) | $0.21 | $0.69 | $1.51 |
| Operating cash flow | Not separately provided | Not separately provided | $18.156 million | $20.292 million |
The quarterly loss reflected $5.134 million of GPT inventory step-up amortization, increased operating expenses, higher interest expense, and a $2.066 million cumulative stock-based compensation catch-up. Excluding the GPT inventory step-up, GPT generated approximately $3.840 million of gross profit and a 68% gross margin for the November 1–December 31 period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $73.979 million at December 31, 2019, compared with $10.185 million at March 31, 2019.
- Working capital was $95.458 million, compared with $9.962 million at March 31, 2019.
- Total assets increased to $423.467 million from $156.767 million, primarily due to the GPT acquisition.
- GPT was acquired for adjusted cash consideration of $181.547 million. The preliminary allocation included $119.130 million of goodwill and $57.029 million of identifiable intangible assets.
- Mesa issued $172.500 million principal amount of 1.375% convertible senior notes due August 15, 2025. The notes had a net carrying value of $138.967 million and an estimated fair value of $188.241 million at December 31, 2019.
- The prior term loan and revolving credit facility were repaid and terminated. No current portion of long-term debt was reported at December 31, 2019.
- The company stated that it was in compliance with its debt agreements and believed available liquidity would satisfy ongoing business and debt-service requirements.
Material changes versus the prior comparable period
- Revenue increased 19% for the quarter and 9% for the nine-month period. The increase included $5.637 million of GPT revenue and growth in Instruments and Cold Chain Monitoring.
- Quarterly gross profit declined 6% and gross margin fell 13 percentage points because of GPT inventory step-up amortization and segment mix. Nine-month gross profit increased 2%, while margin declined four percentage points.
- Quarterly operating expenses increased 26%, including higher selling, general and administrative, and research and development expenses associated with GPT and expanded investments.
- Interest expense increased to $1.929 million for the quarter and $3.522 million for the nine-month period, primarily because of the convertible notes and related discount amortization.
- Nine-month net income declined 50% despite revenue growth, reflecting higher operating expenses, interest expense, and acquisition-related accounting charges.
- Foreign revenue increased to $35.472 million for the nine-month period from $27.522 million. No individual foreign country exceeded 10% of total revenue.
- Cold Chain Packaging revenue declined 89% for the quarter and 56% for the nine-month period as the company exited the business. No revenue is expected from the segment after the quarter ended.
Guidance, outlook, risks and unusual items
- Management expected to reduce the Sterilization and Disinfection Control backlog during the quarter ending March 31, 2020 after completing raw-material vendor changes and product revalidation.
- Management expected Cold Chain Monitoring gross margins to gradually improve toward 40%–45% as product offerings are consolidated.
- Management expected selling expense, including GPT, to be approximately 12%–15% of revenue going forward.
- Management’s anticipated go-forward effective tax rate was approximately 25%, subject to volatility from stock-based compensation tax effects and other factors.
- The company stated that it intended to continue pursuing acquisitions and use remaining capital for acquisitions and general corporate purposes.
- Key risks include integrating and achieving expected performance from GPT, potential impairment of GPT goodwill and intangible assets, servicing or refinancing the convertible notes, foreign-exchange exposure, economic sensitivity of capital-equipment demand, and changes in dialysis-care policy that could affect the Dialyguard product line.
- The company recorded a $276,000 impairment charge for remaining Cold Chain Packaging goodwill and intangible assets. The prior-year comparable periods included a $3.669 million impairment charge and a $3.300 million legal settlement expense.
- The GPT purchase-price allocation remained preliminary and could change materially as valuation work is completed.
- Management declared a quarterly dividend of $0.16 per share payable March 16, 2020.
Most important facts for investors to verify
- Whether GPT achieves expected revenue growth and margin improvement after the temporary inventory step-up amortization and integration period.
- The final GPT purchase-price allocation, including goodwill, intangible assets, deferred taxes, and future amortization expense.
- The company’s ability to generate sufficient cash or equity value to address the $172.5 million convertible notes at maturity, conversion, or a fundamental change.
- Underlying organic growth and margins excluding GPT, IBP, and the discontinued Cold Chain Packaging operations.
- The effect of foreign-currency movements, particularly the Swedish krona, on earnings and accumulated other comprehensive income.
- Potential impairment of GPT goodwill and intangible assets and the sustainability of the company’s dividend and acquisition strategy.